There is no denying that India has come a long way from being a stringent tax system to an equitable slab-rate structure, an effort aimed at widening the tax base and generating more revenue. The government has framed progressive tax policies and procedures, the implementation of which will decide how quickly we move towards a more sophisticated tax system.

Evolution of tax system

The Income-tax department is the biggest revenue mobiliser for the government. It was the financial crisis of the 70s that saw taxpayers face an unbelievable maximum marginal rate of 97.75% on their personal income. This extra-ordinarily high tax rate was subsequently reduced and taxpayers had to pass through 11 slabs progressively, with the tax rate rising from a mere 5% to 75%. Since then, there has been a consistent and gradual decline in tax rates.

India’s tax system has evolved over the last 5-6 decades, with the current maximum marginal rate of tax at 30%. As part of a rationalisation drive, a surcharge of 10% was recently levied on the ‘super-rich’ (having total income of more than R1 crore) to ensure the chunk of tax is collected from people in the high-income bracket.

Simplifying compliance through technology

The government’s focus on simplification by use of technology is a welcome move. Policies and procedures have been introduced for simplifying regular compliance and administration through technology, in line with the trend seen in developing countries. However, it seems the operational environment needs to get acquainted with technology to ensure smooth implementation. The picture on that front is still far from perfection.

Anti-avoidance measures

The last decade saw the government sign information exchange agreements with several countries. The impact of merely having reporting requirements is questionable, and the real objective can be achieved by corrective measures, using the data collected under the agreements.

Compulsory Tax Residency Certificate (TRC)

To ensure only the intended beneficiaries obtain treaty benefits, it is now mandatory for taxpayers to obtain a tax residency certificate from the relevant authorities containing the prescribed particulars. Expatriate employees, even those on short visits to India from countries with which India has a tax treaty, need to obtain TRCs before claiming treaty benefits.

Reporting foreign sources of income made mandatory

To build a transparent tax system, the government is creating laws to track overseas income/assets held by Indian residents. The annual reporting of tax returns in India is now equipped to capture these.

In order to tax unreported incomes and gains, transfers of property (as defined) without consideration/with inadequate consideration in case of individuals and Hindu Undivided Families (except transfers to relatives, on occasion of marriage, inheritance, etc) were recently made taxable. Following the abolition of gift tax, the government’s move of taxing unreported income and gains in the hands of individuals/HUFs has stirred a controversy.

TDS on transfer of property by an Indian resident

A majority of the purchasers/sellers of immovable properties were not quoting their Permanent Account Number (PAN) in the documents, even though statutorily required to do so. In order to have a reporting mechanism for transactions in real estate, the law was amended by including such transactions under the ‘withholding tax’ net. The transferees are now required to deduct tax at the rate of 1% on payments for transfer of immovable property (other than agricultural land).

Bounty for senior citizens

Tax reforms for senior citizens, such as lowering the qualifying age from 65 to 60, exempting them from payment of advance tax where they earn passive income and increasing the limit on tax benefits, have provided some relief.

Introduction of regimes, implementation & abolition

Fringe Benefit Tax was introduced by the Finance Act, 2005, to ease the tax burden on employees by shifting the same on to the employer. However, it was abolished through Finance Act, 2009.

The Direct Taxes Code proposed extensive changes to the overall tax system in India. It aimed at rationalising the tax regime and having a more modern and stable tax structure, which also involved reducing taxes. The draft has undergone some changes, and there is still ambiguity around whether it will bring about the desired change.